Save Article

FASB Issues Update on Cloud Computing Rule

Save Article

The FASB issued ASU 2015-05¹ (the “ASU”) on April 15, 2015, which clarifies the circumstances under which a cloud computing customer would account for the arrangement as a license of internal-use software under ASC 350-40.² As explained in the ASU, the Board released this new guidance as part of its simplification initiative³ and in response to feedback from stakeholders that the absence of explicit guidance on this topic had “resulted in some diversity in practice as well as unnecessary costs and complexity for some stakeholders.” Following is an excerpt from Deloitte’s Heads Up newsletter summarizing FASB’s ASU on customers’ accounting for cloud computing costs.

Key Provisions of the ASU

The ASU amends ASC 350-40 to provide customers with guidance on determining whether a cloud computing arrangement contains a software license that should be accounted for as internal-use software. The ASU cites “software as a service, platform as a service, infrastructure as a service and other similar hosting arrangements” as examples of cloud computing arrangements.

Scope of ASC 350-40

The ASU requires a customer to determine whether a cloud computing arrangement contains a software license. If the arrangement contains a software license, the customer would account for the fees related to the software license element in a manner consistent with how the acquisition of other software licenses is accounted for under ASC 350-40; if the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. The ASU does not prescribe how to account for cloud computing arrangements deemed to be service contracts.

An arrangement would contain a software license element if both of the following criteria are met:

—“The customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty” (emphasis added).

—“It is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software.”

In a manner consistent with ASC 985-605-55-122, the ASU describes “without significant penalty” as containing two distinct concepts: (1) the “ability to take delivery of the software without incurring significant cost” and (2) the “ability to use the software separately without a significant diminution in utility or value.”

The ASU also uses the term “software license element.” Although this term is not defined, the ASU’s Basis for Conclusions acknowledges that an arrangement may include a software license as well as a promise to provide services. In such cases, “the customer should allocate the contract consideration between the license(s) and the service element(s).”

Applying ASC 350-40 to Arrangements within Its Scope

In addition to amending the scope of ASC 350-40, the ASU amends the accounting for arrangements within the subtopic’s scope. Specifically, the ASU supersedes the requirement in ASC 350-40 to determine the accounting for a software license by analogy to the lease classification test.⁴ Under this requirement, the software license would have been accounted for either as a capitalized asset if similar to a capital lease or as an executory contract if similar to an operating lease. Although the Board had originally proposed the superseding amendment in its 2013 revised exposure draft on leases, it decided to include the change in this ASU because “the accounting for software licenses should not be different from the accounting for other licenses of intangible assets.” As a result, entities with software licenses within the scope of ASC 350-40 would account for them in a manner consistent with the accounting for other licenses of intangible assets.

Disclosures

Depending on the method of transition elected, public business entities are required to provide the disclosures indicated in the table below

All other entities are also required to disclose the information above (as applicable to the transition method elected), except that interim disclosures in the first annual period after the entity’s adoption date generally do not apply.

—Produced by Paul Josenhans and Mark Crowley, Deloitte & Touche LLP.

Read the fullHeads Up newsletter to learn more about accounting for cloud computing costs, including “Editor’s Notes” related to up-front costs and assessments to determine whether an arrangement is subject to revenue recognition rules. The newsletter also includes information about the ASU’s effective date and transition period.

Endnotes1. FASB Accounting Standards Update No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.2. For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”3. The ASU states that the FASB’s simplification initiative is intended to “identify, evaluate, and improve areas of [U.S. GAAP] for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of the financial statements.”4. ASC 350-40-25-16 currently states, “Though [ASC] 840-10 excludes licensing agreements from its scope, entities shall analogize to that Subtopic when determining the asset acquired in a software licensing arrangement.”

FASB Issues Update on Cloud Computing Rule

Related Deloitte Insights

In response to the increase in digital technology, and the severity and frequency of cybersecurity threats and incidents, the SEC issued interpretive guidance. The guidance does not establish new disclosure obligations but rather presents the SEC’s views on how its existing rules should be interpreted in connection with cybersecurity threats and incidents. It also emphasized that registrants are responsible for disclosing appropriate information to keep investors informed and must balance the need for timely disclosure with the level of detail they can provide about such incidents.

For private equity portfolio companies, the new revenue recognition standards issued by the FASB and the IASB could change several key financial metrics and ratios, including revenue and EBITDA. Implementation may require considerable efforts to understand the accounting issues and the broader implications for processes, controls and systems. Learn specific considerations that may help companies address implementation and operations challenges.

Tax reform may present challenges for some organizations that prepare their financial statements using International Financial Reporting Standards (IFRS). They include, determining how an aspect of the legislation applies to an organization’s specific facts and circumstances, gathering data to quantify that application, or a combination of the two. Todd Izzo, partner, International Tax, and Paul Vitola, partner, Washington National Tax Group, both with Deloitte Tax LLP, discuss how the interaction between the new tax law and IFRS may play out with respect to net operating losses, the new global intangible low taxed income inclusion requirement, and other issues.

Views & Analysis

Culture is often an overlooked foundation of an organization’s strategy and performance. Yet today diagnostic tools, cognitive analytics, risk sensing and other technologies can provide organizations insights into day-to-day risk factors embedded within their cultures. Carey Oven, Deloitte Risk and Financial Advisory partner, Deloitte & Touche LLP, discusses the challenges organizations face in improving their culture risk profile and ways they can help protect their culture and monitor risks that could damage it.

Recent corporate scandals linked to problematic company cultures have led directors to look for ways to better monitor corporate culture, while trying to understand potential risks and address problems before they become a significant challenge. By treating culture risk as part of an integrated process of oversight that addresses strategy, performance, and risk—and taking a proactive and persistent approach—boards can improve their oversight of culture risk. Learn some general approaches to culture risk oversight that management and boards alike should consider.

Traditionally, internal audit (IA) has focused on providing assurance with respect to known risks and the effectiveness of controls in mitigating those risks. Regulators, however, are increasingly interested in an organization’s ability to identify blind spots and other vulnerabilities that may undermine the integrity of the risk management environment, including the risk of misconduct. IA functions can play a pivotal role by substantively testing culture and identifying potential risk-related outliers that may not be visible via other means, such as supervisory frameworks, escalations, compliance assessment and testing, and previous audits.

Editor's Choice

Robert Hull, chairman of the board of SPX FLOW and a director at Bojangles’ Inc., draws on a deep background in finance and operations for his current governance roles. The former CFO of Lowe’s Companies discusses how his finance career prepared him for a board role, and offers suggestions for what finance chiefs seeking to serve on a board can do to prepare. He also talks about the board’s role in risk management and strategy oversight.

New training models are providing organizations tools to measure, monitor, and address ethical and unethical behaviors. However, ethics training still has far to go to be effective, according to both Christopher Adkins, executive director of the Notre Dame Deloitte Center for Ethical Leadership, and Maureen Mohlenkamp, Deloitte Risk and Financial Advisory principal, Deloitte & Touche LLP. They discuss ways to strengthen ethics programs, advances in whistleblower helplines and how technology is impacting ethics training.

Digital risks are becoming a rising concern for the C-suite and boards, as industries continue to converge and companies adopt new business models to compete. Understand what steps can be deployed to address the strategic risks that come with today’s digital technologies in this conversation with William Ribaudo, managing partner of Deloitte Risk and Financial Advisory’s Digital Risk Venture Portfolio, Deloitte & Touche LLP. Also, learn why organizations should reassess their business models to understand their digital maturity.

About Deloitte Insights

Deloitte’s Insights for C-suite executives and board members provide information and resources to help address the challenges of managing risk for both value creation and protection, as well as increasing compliance requirements.